Mr. John McCarthy:

I realise there is a great deal to take in. I will try to summarise the key points. It is fair to say that the data flow in the past year or so has been encouraging for the most part. There is clear evidence that recovery is gaining momentum. Recovery is being led by the external sectors. We have seen strong trading partner growth, most notably, as Ms Dalton said, in the US and the UK. The one cloud on the horizon is the euro area, where activity essentially stalled in the second quarter of this year. The figures cast doubt on previous assumptions that a turning point in the euro area business or economic cycle had been reached. It is fair to say that soft data on quarter three in the euro area have not been particularly encouraging. There is a clear downside risk in the euro area. As was mentioned earlier, today the IMF revised downwards its forecasts for GDP growth this year in the euro area. What is more important than the external side, where there has been a reasonable performance in the past number of years, is that there is now concrete evidence that recovery is broadening. We are seeing domestic demand make a positive contribution to growth for the first time since 2007. The committee will be aware that domestic demand has fallen quite dramatically. It fell by more than one fifth from peak to trough, but this year it will make a positive contribution. People will feel it in their pockets. There is more employment. Domestic demand is more employment- and tax-rich, so a clear turning point has been reached. That is a positive.
In overall terms, when all data are put together, we see GDP growth of 4.7% for this year, with positive contributions from both net exports and domestic demand. We see GDP growing by just over 3.6% next year, again with a positive contribution from both domestic demand and net exports. I stress the point I made earlier that the forecasts for next year are based on no policy change. Should measures be announced in the budget, we will have to adjust the figures on budget day.
In this final slide, we show the risks to the projections. My view is that the distribution of risk around the central scenario is probably tilted to the downside at this stage. Most of the risks are on the external front. Ms Dalton mentioned geopolitical risks, which appear to have intensified in the past six months. The euro area continues to surprise on the downside. The legacy effects of the crisis, with high levels of public and private debt, fragmented financial markets and the need for further consolidation in some areas, will continue to have an impact on the euro area economy.
There is a big concern about the current low rate of inflation in the euro area, so risks associated with low inflation have come to the fore in the past year or so. The latest inflation figure is 0.3%. My own view is that the probability of outright deflation, which members will recall is a persistent phenomenon, is probably low, but a prolonged period of fairly low inflation is certainly not an implausible baseline scenario. A period of what Christine Lagarde referred to as "lowflation" would be problematic. It raises the real interest rate and it is a de factotightening of monetary policy. It raises the real debt burden and incentivises households and bodies in the public sector to deleverage further, and it also makes relative price adjustment more difficult within the euro area. Vulnerable countries need to improve competitiveness relative to the core, and if the core is running a low rate of inflation, that becomes more problematic for the periphery. It complicates the adjustment in the euro area.
A risk that we have included in the slide of which we are certainly conscious and to which the IMF alluded today in its World Economic Outlook is a concern that many economists would have regarding the financial markets and the so-called underpricing of risk. They are discussing a monetary policy with very low rates of interest which incentivises investors to move to peripheral economy debt and emerging economy debt. That could change rapidly, particularly if there were a change in the monetary policy stance in the US. These are the main downside risks that I see.
There are some upside risks in the domestic market, the key risk being a stronger export performance than we have assumed. There is also a risk that the current low rate of investment normalises more rapidly. In an advanced economy one would allocate about a fifth of GDP to capital formation and investment. The figure in Ireland is much lower than that. We have had under-investment relative to GDP for a number of years. At some stage the figure will need to normalise, and there is the potential for this to happen quite quickly, which will boost domestic demand and so forth. There are upside risks, but on balance the distribution of risk is probably tilted to the downside, given some of the external factors at play.
We will try to answer questions from members.